Otaviano Canuto

The day after tomorrow : a handbook on the future of economic policy in the developing world

Development economists are paid to look into the future. They ask not only how things work today, but also how a new policy, program, or project will make them work tomorrow. They view the world and history as a learning process, past and present are just inputs into thinking about whats coming. It is that appetite for a vision of the future that led us to invite some 40 development economists, most of them from the World Banks poverty reduction and economic management network, an epicenter of the profession, to tell us what they see on the horizon of their technical disciplines and of their geographic areas of specialization. The timing could not be better. The 2008-09 global financial crises shook the ground under the conventional wisdom that had been held as true for decades. From what the role of governments should be in markets to which countries will be the engines of the worlds economy, from what people need to leave poverty to what businesses need to stay competitive, it is all up for reexamination. This synthesis provides an account of what the author heard. It is not meant to be comprehensive. Instead, it picks from each chapter what is new, what is likely to change, and what will be different in the future.

Mercosul: Gains from Regional Integration and Exchange Rate Regimes

This paper assesses the impacts of the Mercosul Preferential Trade Agreement on Brazils regions and their industries between 1990 and 2000 by means of a gravity model, extended to include dummy variables for Mercosul, for a Brazilian region and for a industry within a region. The results show significant positive impacts between 1990 to 1998 to all of Brazils regions, specially the Southern and Southeastern regions. It also shows that the change in the exchange rate regime in Brazil in January 1999 has not reverted the changes in trade biases created in the previous period, with the latter remaining at significantly high levels. The same results were observed for most of the sectors within the regions, i.e., their trade biases with Mercosul countries increased from 1990 to 1998 but fell in 2000, although to levels still higher than 1994 levels. This was specially true for those sectors where trade is managed within the bloc. For the sectors where this condition did not prevail, the drop in its trade bias was more pronounced for all regions.

Dealing with the Challenges of Macro Financial Linkages in Emerging Markets

The 2008 financial crisis has highlighted the challenges associated with global financial integration and emphasized the importance of macro financial linkages. In the financial sector, attention is being directed toward macro prudential regulations that are geared toward the stability of the financial system as a whole. The Third Basel Accord (Basel III) aims to dampen the pro-cyclicality of the financial sector and to reduce cross sectional systemic risks partly by introducing measures to address liquidity and issues of banks being too big to fail. In the macro arena, the facts that price stability was not sufficient to guarantee macroeconomic stability and that financial imbalances developed despite low inflation and small output gaps have highlighted the need for additional tools (macro prudential policies) to complement monetary policy in countercyclical management. Emerging markets face different conditions and have key structural features that can have a bearing on the relevance and efficacy of the measures. The chapters in this volume discuss the challenges of dealing with macro financial linkages and explore the policy toolkit available for dealing with systemic risks with particular reference to emerging markets. This report is organized as follows: chapter one is adapting macro prudential approaches to emerging and developing economies; chapter two is adapting micro prudential regulation for emerging markets; chapter three presents capital flow volatility and systemic risk in emerging markets: the policy toolkit; chapter four presents monetary policy and macro prudential regulation: whither emerging markets; chapter five deals with macro prudential policies to mitigate financial vulnerabilities in emerging markets; chapter six presents sailing through the global financial storm; and chapter seven presents operation of macro prudential policy measures.

Monetary Policy and Macroprudential Regulation: Whither Emerging Markets

Confidence in combining inflation-targeting-cum-flexible-exchange-rate regimes with isolated microprudential regulation as a means to guarantee both macroeconomic and financial stability has been shattered by the scale and synchronization of asset price booms and busts that preceded the current global financial crisis. This paper has a two-fold purpose. On the one hand, it explores the implications and challenges of acknowledging the need for coordination between monetary policies and macroprudential regulation. On the other, it points out specific challenges currently faced by central bankers in emerging economies, as they cope with policy and regulatory coordination in a context of debt overhang and unconventional monetary policies in advanced economies.

Orderly Sovereign Debt Restructuring: Missing in Action !

This paper takes a hard look at the experience with official intervention in sovereign debt crises, focusing on debt crises of the 1980s, Russia in 1998, Argentina in 2001, and Greece in 2010. Based on the track record, the authors argue that in situations where countries face a solvency problem, official intervention is more likely to succeed if official money is lent at the risk-free rate reflecting its seniority and private creditors receive an upfront haircut. Such an approach would limit the costs associated with procrastination and increase the chances of success by enabling a more realistic fiscal program to restore solvency. They examine the moral hazard implications for debtor countries of this proposal and find that these are unlikely to be severe. In fact, after their crises of 1997-2001, emerging market countries embarked on an aggressive and comprehensive program of self-insurance, indicating that they are weary of debt crises and their costs. However, the prospect of an upfront haircut for private creditors in the event of insolvency is likely to make them more diligent in their sovereign lending decisions.

The Curious Case of Brazil's Closedness to Trade

Although Brazil has become one of the largest economies in the world, it remains among the most closed economies as measured by the share of exports and imports in gross domestic product. This feature cannot be explained simply by the size of Brazils economy. Rather, it is due to an economic structure reliant on domestic value chain integration as opposed to participation in global production networking. It also reflects more generally an export base that shows lack of dynamism. Opening up and moving toward integration into global value chains could produce efficiency gains and help Brazil address its productivity and competitiveness challenges.

FLUTUAÇÃO CAMBIAL E METAS INFLACIONARIAS EM ECONOMIAS EMERGENTES

Este trabalho pretende apresentar um modelo-sintese para compreensao de flutuacoes cambiais sob um regime de metas de inflacao, a partir de um modelo Mundell-Flemmig expandido. Procuramos destacar as relacoes entre a escolha de uma meta inflacionaria com o comportamento da taxa de juros e do produto, conforme esperado por uma politica monetaria otima. Nossa conclusao e a de que a estrategia de metas inflacionarias esta fortemente associada a escolha de regimes de câmbio mais flexiveis, e que deve se constituir em sucesso em estabilizar o comportamento de precos em niveis relativamente baixos, o que implicaria alguma trajetoria de crescimento do produto, na ausencia de choque de oferta, mas nao necessariamente de taxa de juros baixas e de taxa de câmbio relativamente pouco volatil.

The impacts of trade facilitation measures on international trade flows

This paper analyzes the impacts of selected trade facilitation measures on international trade flows. A gravity model is used to estimate four equations: a pooled cross-section model; a fixed-effects model; a random effects model; and a Poisson maximum likelihood estimator. The contribution of the paper is twofold. First, the analysis uses a recent data set, a panel that includes trade data from 2011 and 2012 for 72 countries. Second, to measure the impacts of trade facilitation measures, the analysis includes dummy variables for the presence of an authorized economic operator program, the existence of a single-window program in the countries in the sample, and the existence of a mutual recognition arrangement between pairs of countries in the sample. The results show that the presence of an authorized economic operator program and the existence of a single-window program will improve countries’ trade performance. By contrast, the existence of a mutual recognition arrangement will not necessarily improve countries’ trade performance. These results suggest that, in general, trade facilitation measures as a whole will help countries improve their trade performance.

Stagnation and Emerging Market Economies: Keynesian versus Schumpeterian Approach to World Issues

Policy makers in the advanced economies at the core of the global financial crisis can make the claim that they prevented a new “Great Depression”. However, recovery since the outbreak of the crisis more than 5 years ago has been sluggish and feeble. Since these macroeconomic outcomes have to some extent been shaped by policy mixes adopted in those economies in response to the crisis, the appropriateness of those policy choices is a question worth revisiting. This is particularly the case as one considers the hypothesis that a long-run trend toward stagnation may have already been at play during the pre-crisis period, even if temporarily countervailed by pervasive asset price booms.